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Banking Term: Non-Banking Financial Company (NBFC)

Oct 20, 2015 18:23 IST

    Non-banking financial companies (NBFCs) are fast emerging as an essential segment of Indian financial system. It is an heterogeneous group of institutions (other than commercial and co-operative banks) performing financial intermediation in a variety of ways, like accepting deposits, making loans and advances, leasing, hire purchase, etc. They raise funds from the public, directly or indirectly, and lend them to ultimate spenders. They advance loans to the various wholesale and retail traders, small-scale industries and self-employed persons. Thus, they have broadened and diversified the range of products and services offered by a financial sector. Gradually, they are being recognised as complementary to the banking sector due to their customer-oriented services; simplified procedures; attractive rates of return on deposits; flexibility and timeliness in meeting the credit needs of specified sectors; etc.

    What is a Non-Banking Financial Company (NBFC)?

    A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956 engaged in the business of loans and advances, acquisition of shares/stocks/bonds/debentures/securities issued by Government or local authority or other marketable securities of a like nature, leasing, hire-purchase, insurance business, chit business but does not include any institution whose principal business is that of agriculture activity, industrial activity, purchase or sale of any goods (other than securities) or providing any services and sale/purchase/construction of immovable property.

    What is difference between banks & NBFCs?

    NBFCs lend and make investments and hence their activities are similar to that of banks; however there are some differences as given below:

    • NBFC cannot accept demand deposits;
    • NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on itself;
    • Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation (DICGC) is not available to depositors of NBFCs, unlike in case of banks.

    Is it necessary that every NBFC should be registered with RBI?

    As per RBI Act, 1934, no NBFC can commence or carry on business of a non-banking financial institution without obtaining a certificate of registration from the RBI and without having a Net Owned Funds (NOF) of Rs. 25 lakhs (Rs. Two crore since April 1999).

    What are the requirements for registration with RBI?

    A company incorporated under the Companies Act, 1956 and desirous of commencing business of non-banking financial institution as defined under the RBI Act, 1934 should comply with the following:

    i. it should be a company registered under Section 3 of the companies Act, 1956

    ii. It should have a minimum net owned fund of Rs 200 lakh.

     Does the Reserve Bank regulate all financial companies?

    Some NBFCs are have been exempted from the requirement of registration under the RBI Act, 1934 subject to certain conditions.

    • Housing Finance Companies are regulated by National Housing Bank,
    • Merchant Banker/Venture Capital Fund Company/stock-exchanges/stock brokers/sub-brokers are regulated by Securities and Exchange Board of India(SEBI)
    • Insurance companies are regulated by Insurance Regulatory and Development Authority (IRDA).
    • Chit Fund Companies are regulated by the respective State Governments and
    • Nidhi Companies are regulated by Ministry of Corporate Affairs, Government of India.

    The types of NBFCs registered with the RBI are:-

    • Equipment leasing company: is any financial institution whose principal business is that of leasing equipments or financing of such an activity.
    • Hire-purchase Company: is any financial intermediary whose principal business relates to hire purchase transactions or financing of such transactions.
    • Loan company: means any financial institution whose principal business is that of providing finance, whether by making loans or advances or otherwise for any activity other than its own (excluding any equipment leasing or hire-purchase finance activity).
    • Investment Company: is any financial intermediary whose principal business is that of buying and selling of securities.

    Click here to know about DICGC

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